Financing your properties may not be the most exciting part of investing – but if you get it right from the beginning, you give yourself and your portfolio a massive head start.
Blogger: Philippe Brach, CEO, Multifocus Properties & Finance
Structuring your finances is the second most important step on the journey to building a property portfolio. The first most important step is to have a strategy before you start investing. If you don’t plan to get wealthier, you won’t get wealthier!
There is no universal way to structure your portfolio for success – it varies depending on each unique situation.
In every case, though, it should involve selecting a main bank. This is usually one of the major lenders. This ensures flexibility and conviviality, and this lender will offer the features necessary to make it easier to manage your property portfolio.
This approach involves joining the bank’s wealth package program: they all have them. These programs have annual fees of about $400, but they ensure the investor has no other fees, such as monthly fees, switch fees, application fees, valuation fees, etc. They even offer a "free" credit card, which basically means no annual fee.
This does not mean all your loans have to be with the main bank – it just means the management of the various portfolio loans is run from the chosen bank and the other loans will be satellites in the structure.
There are a number of key concepts to keep in mind when financing a property:
In most cases, it is best to avoid cross-collateralising properties. This occurs when a loan is secured by two properties or more.
Banks will recommend such a structure, as it is simple to set up, but it will almost certainly reduce the investor’s options in the future.
For instance, when selling one property, the bank will want to value all properties securing the loan, then decide how much of the sale proceeds they need to keep to ensure the remaining loans are safely secured. If one of the remaining properties does not value well, the bank will almost certainly keep more of the proceeds of the sale to keep the loan-to-value ratio (LVR) at an acceptable level.
There is no need to cross-collateralise. It is easy to extract equity from one property to fund the deposit on a new one. By ensuring that every loan is secured by one property only, the investor will save hassles down the line and keep maximum flexibility in his/her decision-making.
2. Loans with different banks
There is a common myth that an investor should have only one loan with a particular lender, another lender for the second loan, and so on.
The reality is that all loans require a personal guarantee from the borrower, which means that if you default with one bank, this bank can still force the sale of other properties, if needed. It just takes a bit longer if you are with several banks.
Default rates are also pretty low when you structure things this way – so unless you are reckless, it is unlikely to become an issue for the well-educated investor.
I am not advocating having all loans with one bank – I am just saying that a few loans with one bank is not an issue. It will also help you get additional interest rate discounts.
3. Risk management
Any wise investor will have a risk-management plan in place, which will include buffers through a line of credit or savings in case of unexpected expenses. It would be foolish to use all resources to get a deposit on a property then be at the mercy of an unforeseen event (accident, health issue, etc). Similarly, insurance is a great tool for risk management, especially income protection and life insurance.
4. Cheap loans
Finding the cheapest loans through the internet is easy. Sorting what terms and facilities are attached isn’t so easy.
There is no secret to this – if a loan offer appears materially cheaper than the average, there is usually a catch.
Such loans are typically offered by internet-only lenders, which can only process loans for straightforward property purchases.
They can be useful as a satellite loan, but not as a main lender.